Why did the market suddenly drop so severely?

The PPI data quickly dampened the market's expectations for rapid and significant interest rate cuts by the Federal Reserve, leading to a stronger dollar and rising interest rates, causing prices of risk assets to fall in response.

This drop is worth reviewing, as we may experience similar situations repeatedly in the future:

Step 1: What happened?

Data released by the U.S. Bureau of Labor Statistics showed that the PPI for July (which can be understood as an inflation measure of business production costs) exceeded expectations across the board:

Monthly growth: +0.9% (the market originally expected only +0.2%)

Annual growth: +3.3%

The key point is that this inflation increase is widespread, primarily driven by service sector prices (such as wholesale and retail profits, investment advisory fees, hotel accommodation fees, etc.), while commodity prices are also rising (vegetable prices soared by 38.9%).

The data directly indicates that inflationary pressures remain stubborn.

Step 2: How did the chain reaction occur?

1. Sharp decline in interest rate cut expectations

After the data was released, the market almost immediately abandoned the fantasy of a “0.5% rate cut in September,” believing that the maximum would only be a 0.25% cut.

2. Although the stock index did not collapse on the surface, the internal structure of the market has worsened, with sectors particularly sensitive to interest rates (such as small-cap stocks and real estate construction) beginning to lead the decline, and the impact of rising funding costs is becoming apparent.

3. Cryptocurrencies are extremely sensitive to real interest rates and the dollar's movements, leading to more pronounced reactions. Bitcoin's price quickly fell from a recent high of $119,000.

In just a few hours after the data was released, the entire market saw more than $1 billion in long leveraged positions forcibly liquidated.

This created a classic vicious cycle in the crypto market: price drop → triggering forced sales → leading to further price declines → triggering more forced sales. This is also why the decline in the crypto market is always mechanically amplified under macroeconomic shocks.

What to pay attention to next?

The most crucial data to watch for in the coming weeks is the July PCE data to be released later this month, to see if inflation on the consumer side also rises, along with retail sales and initial unemployment claims, to assess whether demand and the labor market remain strong.

Additionally, the speeches of Federal Reserve officials are important. If they believe that this PPI has a limited transmission effect on PCE, market sentiment may stabilize.